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For release on delivery 9:30 a.m. (EDT) July 19, 1983 Statement by Nancy H. Teeters Governor, Board of Governors of the Federal Reserve System before the Subcommittee on Consumer Affairs Committee on Banking, Housing, and Urban Affairs United States Senate July 19, 1983 I am pleased to appear before this subcommittee on behalf of the Federal Reserve Board to discuss S.1152 - a bill incorporating the Board's proposal to simplify the Consumer Leasing Act. We believe that simplification of the act along the lines of the proposal could both reduce the burden of compliance and improve the consumer benefits of the legislation. The Consumer Leasing Act, which was enacted in 1976 following recom mendations by the Board, is primarily designed to insure adequate disclosure of the terms of consumer leases of personal property. It followed enactment of the Truth in Lending Act, and reflected the subsequent development of leasing as an alternative to the purchase of consumer goods on credit. The act covers leases of personal property for more than four months when the property is used primarily for personal, family or household purposes. Automobiles are a common type of leased property and we estimate that about 700,000 automobiles are covered by leases subject to the act. The act also covers leases of home furnishings, though it does not apply to month-to-month rentals of televisions and other home appliances. The act also does not cover other types of short term leasing, such as vacation rental of cars. According to industry experts, consumers are attracted to leases and rentals because of the absence of a downpayment and because monthly payments are often lower than in comparable credit transactions. Consumers may also be attracted to other unique characteristics, such as the lack of a long-term obligation and freedom from maintenance responsibilities. When Congress simplified the credit provisions of the Truth in Lending Act in 1980, no major statutory changes were made to the Consumer Leasing Act, although the leasing provisions are part of the Truth in Lending Act. When -2the Board revised its regulations implementing the Truth in Lending Act in the simplification effort 1t decided not to change the leasing rules, with the prospect that Congress might consider major statutory revisions. Representatives of the auto leasing Industry, members of the Board's Consumer Advisory Council, cons'umer representatives, and the appliance rental industry have argued that the act should be amended. Since simplification of Truth in Lending, the Board has studied the possibilities for similar amendments to the Consumer Leasing Act. parties. Our study Involved a large number of interested Meetings were held with business representatives to learn about developments in the Industry and to explore the need for statutory changes. We also held meetings with representatives of consumer groups to solicit their views on areas of possible abuse and how best to protect consumer rights, while at the same time reducing the burdens on lessors. We sought the views of federal and state agencies on their problems with the present act and their ideas about how to improve 1t. This work convinced the Board that the act could be improved to make it more effective and less costly. This is a particularly appropriate time to consider revising the act. Although the number of transactions now subject to the act is comparatively small, there are several indications that the industry — particularly automo bile leasing -- may be poised for significant growth. First, the yields from lease operations were enhanced by the Economic kecovery Tax Act of 1981. We understand that many potential suppliers of consumer leases, primarily financial institutions, are prepared to enter the market quickly if the anticipated demand materializes. Second, firms already in the market have recently attempted to stimulate demand by offering automobile dealers new, attractive leasing pro grams. Such programs are resulting in greater efforts on the part of dealers -3to encourage consumers toward leasing. Finally, given the high purchase price of automobiles, dealers are promoting the absence of a downpayment and the lower monthly payments in leases relative to purchases. These characteristics enable a consumer to acquire a more expensive automobile for a given monthly budget. In general, the bill builds on the principles used in the simplifica tion of Truth in Lending and our experience with that effort. Both the onqiital Truth in Lending and Consumer Leasing Acts seemed to assume that more disclosure was necessarily better disclosure. In both cases this philosophy led to long and complicated disclosure forms and formidable regulations. Over the years, a general consensus has developed that such a disclosure philosophy is probably unwise. Highly detailed disclosure schemes may be self-defeating by obscuring the most Important information in the amount of detail provided. Furthermore, compliance with complicated regulations Imposes substantial costs, which are ultimately borne by consumers through Increased prices or reduced services. As in the new Truth in Lending rules, the Board has tried to empha size disclosure of the essential information 1n a straightforward manner in the proposed consumer leasing revisions. Our objective has been to reduce the burden of compliance on industry, and at the same time to assist consumers by focusing on material disclosures. In order to meet these objectives, the simplification efforts have involved: o reducing the number of disclosures o reducing the complexity and redundancy of disclosures o segregating the disclosures from the other contract provisions to highlight them o using cross references to the contract for the less important or more detailed terms -4® using plain English both 1st the legislation Itself, and 1n suggested disclosures. Applying these principles to the Consumer Leasing Act, the bill substantially reduces both the number and complexity of the disclosures. For example, under the current statute there may be as many as 21 disclosures; in the bill this number 1s reduced to 13. Although the bili would reduce the Durden of compliance on the lessor in many ways, it expands the coverage to rental-purchase agreements. Rent.il-purchase agreements, sometimes referred to as rent-to-own agreements or terminable leases, generally involve televisions and other home appliances. Under a rental-purchase agreement, the consumer rents the property for a term of one week or one month. The rental 1s automatically renewed with each subse quent payment, and although there 1s no obligation to continue payments, the consumer may become the owner of the property. For many years consumer groups have complained of abuses by some members of t.-iis industry. Consumer representatives, for example, have stated that these companies emphasize the ownership option without clearly disclosing tht; total of payments needed to acquire title, which may be several times the retail price of the ^ocds. In addition, a number of lawsuits have raised the issue of whether property rented to the consumer was new or used. The bill attempts to address these concerns by emphasizing information about how much must be paid before ownership is acquired, the lack of equity in the property until all payments are inade, and whether the property is new or used. The rental-purcnase industry, while contending that it fills a legi timate need in the marketplace, is also seeking coverage under the Consumer Leasing Act. The industry believes that federal legislation will ensure uniform treatment and avoid having these agreements characterized as "sales" under state - 5- law — a process that the industry believes subjects them to Inappropriate reg ulation. Thus, we have the unusual situation In which segments of both consumer and business groups support expanded coverage by federal law. There are several points which I would like to emphasize about our proposal. First, although the Board has done a considerable amount of work developing this simplification proposal, we have submitted it aware of the fact that it may not be the optimal solution in every respect. anticipate that the many groups Vie fully interested in this law will participate actively in Congressional consideration of the bill and that various modific ations may occur during this process. Second, 1n the full spirit of regulatory reform, we have not limited our work to improving the substance of the law. We have also attempted to Improve the existing structure and language of the law, even when we propose no change in substance. For example, the bill consolidates all of the leasing provisions, now found throughout the Truth in Lending Act, under a separate title. In addition, we have tried to write in plain English, eliminating unnecessary "legalese" from the existing statute wherever possible. This approach, of course, presents some risk that editorial changes may suggest a change in meaning where none was intended. We believe, however, that the benefits of Improved readability outweigh any such potential misunderstanding. Third, we have learned from our experience with implementing the Truth in Lending Act that costs are associated with any "simplification," both for those who are regulated and for the regulatory agency. Initially, revised regulations must be written — and the rulewriting process involves substantial public participation, which itself involves costs to the industry. When dis closure changes are required, costs must be incurred for retraining employees, -6printing new disclosure forms, and retaining legal counsel to interpret new requirements and prepare these forms. We have attempted to minimize these costs by simplifying the statutory language and assisting compliance by showing what the disclosure forms might look like. We hope that the one-time conver sion costs would be offset by benefits from the simplified rules in the future, but this aspect cannot be Ignored in any consideration of the value of revising the act. Finally, the proper relationship between state and federal laws 1s always a concern in any federal consumer protection legislation. This bill reflects a narrow preemption of state law, parallel to the approach of the Truth 1n Lending Act. This is an area that the Congress will have to consider carefully. Persuasive arguments can be made that a broad preemptive standard 1s desirable given the interstate operations of the industry and the additional costs associated with complying with patchwork state regulation. On the other hand, a strong argument can be made that the citizens of each state have a legitimate Interest in determining the level of protection they deem appropriate for their locality. In the area of consumer credit law, the Board has gen erally been cautious about suggesting broad federal preemption, and the bill reflects this view. In conclusion, the Board believes it 1s time to build on the Truth 1n Lending experience and consider simplifying the Consumer Leasing Act. We are pleased that the Board's draft can serve as a starting place for this consider ation. The specific provisions of this bill may, of course, be changed and improved as additional information and the views of other interested parties are considered in the legislative process. Congress during this process. We will be pleased to assist the
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